She believed the illusio and she lost most of the money she had invested in GM

She believed the illusio and she lost most of the

This preview shows page 148 - 151 out of 263 pages.

paying the dividend, so it must be doing okay.” She believed the illusion, and she lost most of the money she had invested in GM. Good people like her are being faked out by a close-to-fraudulent practice. Again, dividends are fine if the business has no better use for your money. If you’re retired and need the cash flow from dividends to live on, then investing in a great business with steady dividends is a good idea as long as the dividends come from real free cash flow . Here’s how you know if the dividends are being paid from something other than cash flow. Look at the Cash Flow Statement for the business on MSN Money or Yahoo! Finance. Look at the line that says Total Cash Dividends Paid. See the last three years, where GM paid out $567 million, $563 million, and $1,134 million? Now look two lines below and you’ll see where they got the money. In 2003 and 2004, GM borrowed a total of $58 billion and $17 billion. In the next three years it paid back $12 billion of it and used some of it to pay dividends. Clever, no? They put the owners, that would be you , on the hook for a loan and then pay you dividends with it and
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you thank them for the money by keeping their stock even while it loses 100 percent of its value. Dividends, particularly large, steady dividends, are to be viewed as if you are the business owner, not as if you are an ignorant coupon clipper. If you’re going to own a business in part for its steady dividend, be sure you understand the business well and, in particular, that you understand where the dividend money is coming from. Every word here applies equally to DRPs (pronounced “drips”), Dividend Reinvestment Programs. DRPs are usually run by the business itself to save you the cost of a commission on buying more of their stock. Once you’ve signed up for their program, they will automatically reinvest the dividend payment by purchasing stock at the price Mr. Market has set that day. If this sounds smart to you, I want you to reread the part about Mr. Market above, along with all of Chapter 3 . Don’t be tempted by convenience to buy stock at a price over its value. DRP programs contribute to overpricing because they’re on autopilot and they have an idiot flying the plane who has no clue about value. Your DRP is going to buy at whatever price Mr. Market offers up, no matter how stupid it is. The only advantages to doing this are (1) it’s on autopilot so it’s going to get done, and (2) there is no commission so you can afford to buy small pieces. But you’ll pay a price for that by buying when you shouldn’t. Okay, you’ve found a wonderful business and you know its value and MOS Price. You did your Payback Time evaluation and you selected a price you’re willing to pay. This is your Stockpile Price. Now you wait. Patiently. Stockpile Price equals what you’re willing to pay. This can be the MOS price or Payback Time price. And, again, your Payback Time price is the price at which you can theoretically get your money back in ten years or less. (See Chapter 4 again.) STEP THREE: WATCH IT When a candidate on your Candidate Watch List makes the grade and becomes a business you want to buy at a certain price, it goes to your
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Watch List. Your Watch List is a list of the businesses you want to own.
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  • Spring '20
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